HTS - ITM covered call

Fundamental

- HTS borrows money at a low interest rate and invests it at a higher interest rate in an iron-clad safe, government-guaranteed bonds. It earns the difference – the "spread.". It is a virtual bank. A similar business is NLY – Annaly Capital. NLY is 9 X bigger.

- I like the business model. And when it's in its sweet spot, it makes a fortune. It is invested not toxic waste debt but government guaranteed bonds, just like treasuries.

- Recent financial statement shows that HTS borrowed money at 2% and invested it with no credit-risk at 5%. So it earned a 3% spread. With 8 times leverages – 3% spread becomes 24%. Most bank use much higher than 8X leverage.

- There is very little overheads. Thus Operating Margin is equal to Profit Margin equals to a hefty 54.35% Cash to share is a healthy 4.77. It is 71.6 % owned by institution.

- Interest rate is forecasted not to go up. It can invest the money at a higher rate. The Fed has maintained this week that it will not raise interest rate for near to mid term.

- Most attractive is that this company has a dividend yield of 18% annually.

Considerations:

- It is a longer term trade
- Company balance sheet must be solid enough to provide the dividends
- Goal is to capture the high dividend while controlling the risk. In this case, the risk is minimal. Probably of stock going below 24 is very low

Trade

BTO Stock 1000 at 28.8
STO 10 contracts May 2010 25 short call at 4.1
Cost basis: 24.7
Max Reward: 2.1 + 2.2 ( dividends for half year ) = 4.3 or 17.5 % or 35 % per annum


PE: This is an ITM covered call. Will allow the stock to be assigned.

SE: Stock long term support is clearly at 24. If stock goes down to this level, I will decide to add a put to make it a collar if the market is very bearish or just roll the call out in time if there is no real bearish factors for the stock to go a lot below this support.

A similar trade can be made for NLY which I have already some positions in my portfolio

I will consider to close the trade when the Fed is consider raising rates and take profit.